The proliferation of craft beers on the market is hurting Boston Beer (NYSE:SAM), as sales of its flagship Samuel Adams brand continue to fall. Even though Boston Beer is arguably the face of the craft beer industry, the company has had to turn to its line of hard teas and ciders to keep depletions from falling.
Now, Boston Beer is turning to a different kind of alcoholic beverage to blunt the threat posed by a newer offering that has emerged on the market, one that could cause its Twisted Tea and Angry Orchard brands to stumble: hard soda.
Hard soda is quickly generating a lot of buzz, as Nielsen data shows it was the fastest-growing new product this year in craft beer. Pabst Brewing found a big hit on its hands with Not Your Father's Root Beer, a hard soda produced by Small Town Brewery that Pabst distributes nationally.
The surging popularity of what is essentially a completely new category has caught the attention of brewers big and small, who are rushing to bring their own formulations to market. In August, MillerCoors, the joint venture of SABMiller and Molson Coors, announced that they were introducing a line of hard soda called Henry's that would initially offer ginger ale and orange flavors. In October, craft brewer Saranac said it was launching a line of Jed's Hard sodas in root beer, orange cream, and black cherry cream flavors built on its soft drink brands. And Boston Beer completed the national rollout of its own offering, Coney Island Hard Root Beer. There are also a number of small, regional brands, too.
A taste that lasts?
Whether this is a trend or a fad, however, remains to be seen. Anheuser-Busch InBev (NYSE:BUD) had huge success with its line of flavored malt beverages such as Lime-a-Rita that sparked many brewers to rush to market with their own versions, including Redd's apple and strawberry-flavored ales.
But sales have apparently since tanked, with market research firm IRI saying Anheuser-Busch's beverage coolers have tumbled almost 10% over the 12-month period ending this past July.
Hard teas and ciders also burst on the scene a few years ago, also seemingly out of nowhere. While there's a long historical tradition of hard cider, it was Boston Beer's Angry Orchard that really set the category on fire, virtually stealing most of the market from one-time industry leader, Woodchuck Hard Cider.
Part of the appeal of hard cider was its ability to bring new drinkers to the market. Two years ago, the analysts at Rabobank reported that the industry had grown by half over the previous decade, with more than half of those drinking it being women. Euromonitor was looking for domestic cider sales to grow 10.6% annually through 2016, compared with a 1% decline in beer sales.
Brewing up trouble?
The 6% increase in depletions Boston Beer has recorded over the past three and nine-month periods has been the direct result of growth in its Angry Orchard portfolio, supplemented by its Twisted Tea brand of hard iced tea. Hard soda could very well be a new, successful portfolio expansion.
But there are still risks, namely that it's soda. As the tobacco industry found out when it started using cartoon images such as Joe Camel in its advertising, it quickly was accused of trying to lure kids into smoking. A similar argument could easily be made with the addition of alcohol to soda.
It has certainly been the case with energy drinks that were infused with alcohol, such as Torque and Four Loko. The challenges these caffeine-infused drinks produced, particularly around college campuses, caused them to come under regulator scrutiny, and they've all but disappeared from the market. Four Loko, which is owned by Phusion Projects, changed its formulation to keep it on store shelves. Phusion is also reportedly a contract bottler for Small Town's hard soda.
Boston Beer has had some early success with its Coney Island brand, which is why it has expanded the flavors to now include ginger ale and orange cream ale. But as the craft-beer industry is discovering, the proliferation of so many breweries has watered down the results for the industry's leaders. The danger for Boston Beer is that hard soda will also dilute the strength of its hard cider, a trend that could cause profits to go as flat as a can of open beer.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool recommends Anheuser-Busch InBev NV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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